Back on its feet

Is there life after product-liability suits? The former Sulzer Medica hopes so

NEW home, new name. On June 1st Sulzer Medica, a Swiss maker of medical devices, rebranded itself Centerpulse. A few weeks earlier, the firm had moved into a new building in Zurich, partly in the belief that the city has a more dynamic, sandwich-at-the-desk atmosphere than its old home, Winterthur, a few miles away. Workmen are still on site, and the company's name is not yet on the board outside. Helpfully, a sheet of paper stuck by the lift directs visitors to the fifth floor.

The changes of identity and location are the result of Centerpulse's final separation from its former parent, Sulzer, an industrial firm. They coincide with a third kind of fresh start: only on May 31st did Centerpulse agree to settle an American product-liability class-action suit. Its share of the $1 billion cost is $725m. More than 30,000 people received hip or knee implants, made by an American subsidiary, on which traces of oil remained after manufacture. The 3,530 worst-affected patients, whose faulty implants had to be replaced, will get an average of $200,000 each.

This may sound expensive, but it could have cost more. At worst, says Stephan Rietiker, Centerpulse's chief executive since last September, the company might have had to shut up shop in America, where it earns 40% of its revenues. The affected subsidiary would surely have opted for Chapter 11 bankruptcy had it been unable to settle with the vast majority of patients. Look at the $5m awards (albeit since substantially reduced) made last year to three plaintiffs by a Texas jury, says Mr Rietiker. The threat of bankruptcy, he says, “put a lot of pressure on the plaintiffs' lawyers”. By June 19th, all but 13 of the worst-affected patients had joined the settlement.

To deal with the suit, however, the company had to do more than merely threaten bankruptcy and offer cash. Shortcomings in management also had to be sorted out. Thanks in large part to the product-liability case, almost all the company's top brass have been replaced in the past year.

The old Sulzer Medica management made the mistake of trying to fight cases individually rather than seeking a class-action settlement. Not only was this risky, as the Texas judgment showed; it also made it likelier that similar patients would be paid different amounts. The firm lacked expertise, in particular a lawyer with experience of risk management, a gap plugged by the hiring as chief risk officer of Gabor-Paul Ondo, a former executive at UBS, a big bank that has dealt with plenty of nasty incidents in recent years.

Mr Rietiker says that when he joined the company last June, the scale of the problem was unknown. That was unacceptable, in his opinion, given the enormous amount of internal data on batch numbers and quality control, as well as the company's close relationship with surgeons. “We had to get rid of some people,” he says, “because they didn't really tell us the truth. I think some people were simply frightened to report the cases.”

How much can other companies struck by product-liability cases learn from Centerpulse? Assessing the maximum scale of the damage and using the threat of bankruptcy obviously helped. However, so did the clear-cut nature of the case. It was evident that the company was to blame; faults in hip or knee replacements come to light within a few months; the company had no deaths to answer for. Cases involving drugs or asbestos, say, are not usually so straightforward.

Just as hard to assess is the long-term damage all this has done to Centerpulse. Its reputation has suffered—and it was further dented when a British patient died last month after a simple testing device, supplied but not manufactured by the company, broke. Mr Rietiker says that American surgeons are returning to the company: revenues from joint replacements in the United States were 10.2% higher in the first quarter of this year than in the same period of 2001.

There is still plenty to do, even though the share price has recovered from the clobbering it took as the implant catastrophe unfolded (see chart). Mr Rietiker inherited a clutch of overpriced acquisitions from his predecessors. Centerpulse said last week that it would sell its heart-valves and vascular-products businesses and concentrate on its old core of hip and knee replacements, plus products that encourage the body to regenerate its own tissue. This sharper focus ought to make the company stronger—though perhaps not strong enough to stay independent for long.